Reforming public finance beyond the ‘wellbeing budget’

The Government has been consulting with ‘a group of experts’ – including Michael Cullen – on a new approach to managing the government’s finances, which could have a massive impact on future budgets.

Newsroom:  Cullen consults on massive Budget shake up

Treasury has brought in former Finance Minister Michael Cullen to consult on government budgeting as it tries to shift the focus away from surpluses

Dubbed a “stewardship” approach, it aims to take a more long-term view of public finance. A paper released to Newsroom under the Official Information Act shows Treasury has already begun work on reforming the public finance beyond the ‘Wellbeing Budget’ which will be delivered on Thursday.

The briefing notes that the current public finance system is 30 years old and may not adequately serve the needs of today’s governments. It said that the current work on the Wellbeing Budget and the Living Standards Framework will “only take us so far”, and further work was needed to fix “underlying issues with our public finance settings”.

Treasury says the approach is about moving from a “management” to a “system stewardship” approach to the public finance system. This could involve further changes to the Public Finance Act, a piece of legislation drawn up in 1989 that forms the cornerstone of public finance in New Zealand.

Finance Minister Grant Robertson told Newsroom the Government was “certainly moving forward” with the ideas in the paper.

Treasury believes the public sector is “not working well for everyone”. It singles out struggles in responding to “complex needs and issues” as well as “longer-term opportunities and risks”. It lays the blame, in part, on “a range of underlying issues with our public finance settings”.

It says the current settings encourage “silos” and a short-term focus. These settings mean it can be difficult to move funding across several years when it makes sense.

The reporting requirements placed on the Government focus on “outputs not outcomes,” and it incentivises “compliance and risk aversion,” rather than “innovation”.

Treasury said the new approach would “support better collaboration”, and place “more emphasis on the long-term to support innovation, asset management and capacity-building”.

One change being discussed would substantially alter how baseline funding is appropriated. Currently, bids for cost pressure funding is bid for on an annual basis, which Treasury says is “resource intensive”. This could change to a multi-year “defined period” bid, which would be more flexible.

Government budgets should have medium and long term considerations. I don’t think this is particularly new – the Cullen Fund was designed as a long term  means of financing superannuation as the population grew older. And many budget items are for multiple years (four years is common).

Last September, Treasury officials met informally with a panel which included former Finance Minister Michael Cullen, former ACT candidate and ex-Treasury Secretary Graham Scott, Victoria University Professor Jonathan Boston, and former State Services Commissioner Iain Rennie.

The group urged caution before changing “what is internationally a very good public finance system”.

Speaking to Newsroom, Cullen said there was merit in looking at long-term risks so long as a balanced approach was taken.

“So long as focus on the long-term doesn’t become an excuse for doing stupid things in the short-term then there’s a great deal of sense in getting that long-term focus,” Cullen said.

He said long-term risks like the costs of super and health care, combined with unexpected risks like earthquakes meant a prudent approach should still be taken.

“We are a country which faces quite significant risks that will suddenly descend upon us. We don’t have the slightest clue they’re going to happen,” he said.

Jonathan Boston told Newsroom that moving away from a narrow focus on GDP as a measure of the economy was wise.

“GDP is a flow measure; it measures the value of goods and services but it doesn’t tell you what’s happening to income distribution and to other financial measures, more particularly it doesn’t tell you what’s happening to the stocks of capital in a society or your human capital stock,” Boston said.

Reassessing how budgeting is done is a good thing. We will have to wait and see whether changes that happen as a result of this consultation turn out to be a good thing – and that could take many years to determine.